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Law > Business and Financial

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Cover Departmental Papers
Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework
Corinne C Delechat, Umang Rawat, and Ara Stepanyan
As relatively small open economies, South-East Asian emerging markets (Indonesia, Malaysia, Philippines and Thailand or ASEAN-4) are highly susceptible to external shocks—both financial and real—that could induce large capital flows and exchange rate volatility that could lead to foreign exchange market dysfunction. With the exception of Bank Negara Malaysia, ASEAN-4 central banks mostly have flexible inflation-targeting frameworks for monetary policy implementation. Their main policy objectives include medium-term price stability, sustainable economic growth, and financial stability. Central Banks in ASEAN-4 economies have been early pilots in the operationalization of the IMF’s Integrated Policy Framework (IPF) in 2022-23, given their experience in using multiple policy tools besides the monetary policy rate, including macroprudential measures, foreign exchange intervention (FXI), and capital flow management measures, to achieve their multiple objectives. They have welcomed the IPF as a systematic, frictions-based approach to analyze the use of these multiple tools to manage trade-offs across policy objectives. This paper takes stock of the experience from these pilots, both from the perspective of country authorities and of IMF country teams. It aims at distilling key lessons, which could be used to inform broader IPF operationalization. The IPF conceptual framework and a related quantitative model were used to assess policy trade-offs in ASEAN-4 in the event of adverse external shocks. These applications reaffirmed the importance of using monetary policy to address persistent inflationary pressures stemming from real shocks and allowing the exchange rate to act as a shock absorber. However, a complementary use of FXI could improve trade-offs between price, financial, and output stability when economies are faced with large and financial shocks that result in abrupt spikes in uncovered interest rate parity premia resulting in inefficiently tight financial conditions that could hurt growth or risking to de-anchor inflation expectations. The IPF pilots also highlighted some challenges faced when operationalizing IPF principles, notably regarding the assessment of frictions and shocks that might justify the use of FXI. In particular, country teams at times lacked sufficient information to adequately assess the extent of frictions. Moreover, the time-varying nature of IPF frictions and the non-linear effects of shocks make it difficult to assess situations when benefits of a complementary use of FXI would overweigh its costs.
Keywords:
ASEAN; foreign- exchange intervention; Inflation targeting; Integrated policy framework; capital flows; IPF pilot; market dysfunction; IMF country team; IPF model; Policy mix; IMF seminar participant; Currency markets; Exchange rates; Inflation; Southeast Asia; Global
Cover Selected Decisions and Selected Documents of the International Monetary Fund
Selected Decisions and Selected Documents of the International Monetary Fund
Forty-Third Issue Supplement
International Monetary Fund. Legal Dept.

Abstract

A supplement to the Forty-Third Issue of Selected Decisions and Selected Documents of the International Monetary Fund, incorporating items posted after January 1, 2023.

Keywords:
MCP decision; Review of the Fund's Policy; payments policy; adequacy assessment framework; fund surveillance; Balance of payments need; Anti-money laundering and combating the financing of terrorism (AML/CFT); Liquidity; Lines of credit; Global
Cover IMF Staff Country Reports
Libya: Selected Issues
International Monetary Fund. Middle East and Central Asia Dept.
This Selected Issues paper identifies the sources and quantifies the exchange market pressures on the Libyan dinar. The paper highlights that: (1) the cumulative pressure on the exchange rate has been negative; and (2) despite the alternating appreciation and depreciation pressures, foreign exchange reserves have remained relatively stable. The authorities’ toolkit is limited: they strive to maintain the stock of reserves at a high level and to keep the exchange rate peg intact, all without the use of fiscal policy or of conventional monetary policy instruments. Therefore, developing conventional monetary policy tools and making sure that fiscal policy is consistent with the overall macroeconomic objectives would help the authorities achieve their goals without resorting to capital flow measures. While Libya had periods of both depreciation and appreciation pressures, overall, it faced substantial depreciation pressure. In other words, Libya’s policies over the medium term were not in line with the three-pronged macroeconomic objective of maintaining high foreign reserves, a pegged official exchange rate, and a narrow gap between the parallel and the official exchange rates. The findings suggest that additional monetary tools and the use of fiscal policy can help contain the parallel market premium and avoid the use of capital flow measures.
Keywords:
exchange market pressure; EMP index; copyright page; weakening exchange rate; market rate; Currency markets; Exchange rates; International reserves; Depreciation; Eastern Europe; Global
Cover IMF Staff Country Reports
Maldives: Financial System Stability Assessment; and Press Release
International Monetary Fund. Monetary and Capital Markets Department
This paper presents financial system stability assessment (FSSA) report for Maldives. Maldives is a tourism dependent economy with a small financial sector dominated by state-owned banks. Systemic risks stem largely from a growing sovereign-bank nexus, high dollarization, and a shortage of foreign exchange. The Financial Sector Assessment Program concluded that further strengthening of financial sector policies is needed to improve the resilience of the financial system. The authorities should adopt regulation to address frictions in the foreign exchange market, resume liquidity management operations and develop systemic risk indicators. Priority should also be given to establishing a macroprudential framework along with instruments, publishing a financial stability report, and ensuring full reporting of non-bank payment obligations. The financial safety net and crisis management arrangements should be enhanced by improving early intervention mechanisms, introducing recovery and resolution planning, and enhancing the deposit insurance system. In addition, an effective liquidity assistance framework should be established.
Keywords:
World Bank FSAP mission; risk analysis; IMF FSAP stress test result; MMA central government debt holding; FSAP finding; bank capitalization; Financial Sector Assessment Program; Stress testing; Financial sector stability; Global; Asia and Pacific
Cover Shocks and Capital Flows
Shocks and Capital Flows
Policy Responses in a Volatile World

Abstract

The high exposure of open economies to shocks makes them particularly vulnerable to volatile capital flows and advanced economy monetary policy spillovers. How should and do domestic policymakers respond? The traditional answer has been to use flexible exchange rates as a shock absorber. But flexible exchange rates may not offer full insulation when financial markets are imperfect. This book brings together recent empirical studies at the International Monetary Fund (IMF) on the effectiveness of different tools in responding to such shocks. The 18 chapters in this volume provide a rich background to the recently launched Integrated Policy Framework by the IMF. They comprise assessments of countries’ actual use of different tools, as well as in-depth evaluations of their effectiveness and side effects, covering macroprudential policies, monetary policy, foreign-exchange intervention, and capital flow management policies. Many of the studies involve new data and methods to tackle the inherently difficult problems in identifying and comparing the effects of policies under different circumstances. As a result, the volume offers the reader a comprehensive, in-depth coverage of the policy-oriented empirical research that has informed the development of a new way of thinking about open-economy macroeconomics at the IMF.

Keywords:
Capital flows; monetary policy; exchange rate policy; foreign exchange intervention; macroprudential policy; capital controls; FX debt; account restrictiveness; exchange rate intervention; IT regime; Exchange rates; Macroprudential policy instruments; Global; Asia and Pacific; Caribbean; Central America; Europe
Cover IMF Staff Country Reports
Republic of Fiji: 2023 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. Asia and Pacific Dept
The 2023 Article IV Consultation discusses that Fiji’s economy rebounded strongly in 2022, as tourism recovered rapidly. With the rapid rebound in tourism, the economy is experiencing a strong recovery. Nevertheless, significant risks to growth remain both on the demand side—due to the global outlook—and on the supply side—due to capacity constraints and price competitiveness. The recovery and ongoing broad consultations make the upcoming budget a critical opportunity to begin rebuilding Fiji’s fiscal space and reducing vulnerability. Monetary policy needs to begin shifting now to a more neutral stance, amidst growing uncertainty to the outlook for inflation and foreign reserves. Addressing the implementation challenges of Fiji’s climate plans will require increased efforts and financing. Advancing climate adaptation plans will help Fiji transition to a more sustainable and resilient growth model. Accelerating investments on renewable energy will help Fiji diversify its energy sources and reduce external imbalances. However, Fiji’s climate adaptation and mitigation plans face significant challenges, including shortfalls in climate financing, implementation capacity, and investment management.
Keywords:
maturity proceeds; relocation plan; climate plan; airline ticket sale; CPI data; Government finance statistics; Exchange restrictions; Global; Pacific Islands
Cover IMF Staff Country Reports
Iceland: 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights Iceland’s continued real GDP growth, driven by tourism. Growth reached 7.2 percent in 2016 and is projected at almost 6 percent in 2017 before tapering to about 2.5 percent over the medium term. Bank credit to the nonfinancial private sector remains muted, growing only 4.3 percent in 2016, but it is expected to pick up. Thus far, growth has been driven not by leverage but by exports, private consumption, and investment. Iceland’s current account surplus is projected to shrink modestly over time, with some export sectors suffering while others thrive.
Keywords:
ISCR; CR; fiscal policy; IMF staff projection; economy; inflation expectation; exchange rate volatility; prudent fiscal policy; CBI transactions; inflation prospect; Tourism; Current account; Inflation; Global
Cover IMF Working Papers
Emerging Powers and Global Governance: Whither the IMF?
Rakesh Mohan and Muneesh Kapur
The governance structure in global bodies like the IMF continues to be disproportionally dominated by advanced economies. Sustained rapid growth in emerging and developing economies (EDEs) in the past 2-3 decades has led to their growing relative weight in the global economy, but with little increase in their voice in the IMF. The emergence of regional financial arrangements reflects the growing dissatisfaction of the EDEs with the current framework. The global economy is on the cusp of an epochal change moving the fulcrum of economic power from the North Atlantic towards Asia after more than 200 years. This must be recognized and responded to adequately.
Keywords:
WP; quota resource; IMF governance; IMF reform; IMF resource; quota share; Emerging Markets; Global Governance; International Monetary Fund; Quotas; IMF quota increase; IMF article; summit meeting; governance structure; Purchasing power parity; Financial sector stability; Public investment and public-private partnerships (PPP); Global; Europe; North America
Cover IMF Staff Country Reports
Georgia: Financial Sector Assessment Program-Macroprudential Policy Framework-Technical Note
International Monetary Fund. Monetary and Capital Markets Department
The National Bank of Georgia (NBG) has a broad mandate to safeguard financial stability in Georgia and has applied several measures that can be considered macroprudential. For instance, the NBG adjusted risk weights for foreign-currency (FX) loans to unhedged borrowers in a countercyclical manner in recent years. Going forward, it plans to introduce the Basel III countercyclical capital buffer regime for the banking system in 2015, which will require that it sets or releases the buffer on a regular basis, based on assessments of cyclical risks. Policymakers should consider establishing a full-fledged macroprudential policy framework in line with international best practices. The current framework is too broad to support the effective and transparent use of macroprudential policy going forward. An improved system would involve a revised legal framework to cement the use of a broad range of macroprudential instruments, the establishment of a Financial Stability Committee at the NBG level, and strong accountability and communication practices, including by the publication of regular reports on financial stability. The list of available macroprudential instruments should go beyond risk buffers and allow the NBG to set measures that directly influence the banks’ activities, e.g., through the application of loan-to-value (LTV) or payment-to-income (PTI) caps. The introduction of macroprudential measures for FX-induced credit and liquidity risks have led to a strengthening of banks’ risk buffers. On the asset side, additional risk weights are applied to FX loans to unhedged borrowers, while on the liability side, reserve requirements are higher for FX deposits and other borrowings. Furthermore, banks have to hold more liquidity for nonresident deposits (of which 92 percent are in foreign currency as of end-2013), if those deposits exceed 10 percent of total deposits. Combined with the general liquidity regulation, these measures have increased banks’ capital and liquidity buffers, as shown in the results of the FSAP solvency and liquidity stress tests. The planned introduction of buffer requirements to mitigate cyclical and structural risks is a welcome step. The countercyclical capital buffer and the capital surcharge for systemically important banks are planned to be implemented over the next few years. The capital surcharge for systemically important banks, which would currently apply at least to the three largest banks by total assets, is particularly important in the Georgian context due to the high market concentration in the banking sector.
Keywords:
ISCR; CR; break; bank; FX; risk; NBG methodology; NBG plan; NBG Repersentatives; FX loan; granular data base; NBG's accountability; central bank; Financial sector stability; Macroprudential policy; Liquidity requirements; Global
Cover IMF Staff Country Reports
People's Republic of China: 2011 Article IV Consultation
International Monetary Fund
In this study, China’s economic developments and policies are discussed. Economic growth has been increased by expanding infrastructure and real estate construction. The policy measures outlined in the twelfth five-year plan and implementation of financial reform are important for China’s balanced global growth. The price-based tools of monetary policy, improvement over monetary policy framework, and interes